Revisiting a History of Marriage in the Tax Code, Part 4

Revisiting a History of Marriage in the Tax Code, Part 4

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Back in 2014 and into 2015, I posted a multi-part series of posts about the history of marriage in the tax code. In 2016 I was asked to condense that series into a CPE presentation. Here are excerpts from that presentation. This series of posts will cover a lot of the same ground as was covered three years ago, but hopefully with a little bit fresher perspective.

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As mentioned toward the end of Part 3, married couples in the 1910s overwhelmingly filed “joint” tax returns — only 2% of returns filed in 1920 were separate returns.

There are two explanations why joint returns were so common even after the major tax changes from 1917-1919:

There were fewer women in the workplace and thus more one-income married couples. According to the U.S. Department of Labor, women made up just 21% of the labor force in 1920, compared to 47% in 2010. By default, a tax return filed by a one-income married person was counted as a “joint” return.

Even though the tax rates after 1917 were different from what the tax rates were in 1913, many taxpayers still fell within the first range of the tax bracket. The 4% tax bracket applied to the first $4,000 of taxable income. There was a $2,000 exemption amount for married couples, and an additional $200 exemption for each dependent. So, a family of four could have combined gross income of $6,400 (the equivalent of about $78,000 today) and still fall in the 4% range.

As an interesting side-note follow-up to item #1, diving deeper into the labor statistics for the early 20th Century shows that just 9.5% of married women between the ages of 25 and 44 were in the workforce. The people earning money back in those days were overwhelmingly men; women didn’t usually have separate income of their own.

Now let’s look at a few examples of how this worked, using 1920 tax brackets.

Example 1:

In 1920, John has gross income of $5,000; Jane has gross income of $1,000. Subtracting out the $2,000 exemption amount leaves them with 4,000 of taxable income, which puts them in the 4% range of the tax bracket. They would still be in the 4% range if they filed separate returns. For John and Jane, filing a joint return makes the most sense from a standpoint of simplicity.

Example 2:

In 1920, John has gross income of $10,000; Jane has gross income of $2,000. If they file a joint return, their taxable income is $10,000. The tax on $10,000 is $750. Or, they could file separate returns. John would likely claim the full $2,000 exemption amount himself, knocking his taxable income down to $8,000. The tax on $8,000 is $530. Jane’s taxable income would be $2,000, which creates a tax of $80. The total tax owed filing separately is thus $610 ($530 + $80), a savings of $140.

John and Jane would most likely file separate returns.

(Income of $10,000 in 1920 is equal to about $112,000 today; income of $2,000 in 1920 is equal to about $22,000 today.)

As these examples illustrate, filing a separate return was only advantageous if both spouses had income and their combined taxable income pushed them enough above the 4% range of the tax bracket to make it worthwhile to file separately.

Planting the Seeds of Filing Statuses

So at this point, we know that the tax-law changes made between 1917 and 1919 did not affect the way most married couples filed tax returns. However, this was not always the case in “community property” states. To continue our story of how we arrived at filing statuses in the tax code, we must now turn to community property states and how they planted the seeds of the filing statuses we now use.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”

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The articles on this blog are presented for general informational purposes only. This blog, and any responses to questions posed in the "comments" section of blog posts, should NOT be considered tax advice. Because each taxpayer's situation is unique, you should pay a tax advisor to discuss your unique situation before you make any financial decisions.